Clinton Caught Between Voters, Financial Markets

ANALYSIS

WASHINGTON - — The blueprint for tax cuts that President Clinton unveiled on Thursday night was not only an appeal to disgruntled middle-class voters.

It was also directed at the nation's nervous financial markets, which may ultimately hold the veto power over the best-laid budget plans of either Democrats or Republicans.

While it may have been fear of more middle-class wrath that forced Clinton to move at all, fear of the markets kept the proposal tiny on any national economic scale.

Sixty billion dollars over five years may seem like a lot of money, but it is a drop in the stream of a $6 trillion economy.

Anything much bigger, economists said on Friday, would trigger doubts that either party could pay for the tax cuts they are championing with equivalent spending reductions.

And even a hint that the administration might be weakening in its commitment to pay for any tax reduction would almost certainly lead investors to drive up interest rates, undercutting the same home buyers and university students whom Clinton says he is dedicated to helping.

This counterbalancing is just the most recent illustration of how little room the president, or his opponents, have to maneuver, at least if they stick to the commitment not to make cuts in the biggest entitlement programs: Social Security, Medicare and Medicaid.

And the markets are imposing a vague sort of discipline on the notoriously flexible budget process.

"The bond market will sniff out any flimflam in the cuts," said Allen Sinai, chief economist at Lehman Brothers. "And if that pressure is felt by both political parties, the result could be that Washington really will be forced to drastically cut the least productive segment of the economy - the government itself."

Bentsen said there would be "not one penny of increase" in the budget deficit as a result of the tax cuts.

But as he was packing up to return to Texas, Bentsen expressed concern that the result of the president's initiative, on this and a range of other issues, would be to force the Republicans to make even more dramatic gestures.

It is just that scenario that could spook the bond markets, which are hypersensitive to any suggestion that the federal deficit will worsen, after several years of successful reductions.

Some voters, Clinton's aides said before November's election, would rather see more aggressive deficit reduction than a tax cut.

But that was October. No one in the White House was talking about that option on Friday.